The buyer and seller in a transaction rarely see eye to eye when it comes to warranties and indemnities – the buyer typically wants as much protection as possible, while the seller wants to limit its liabilities. Those tensions can thwart a sale but warranty and indemnity insurance is increasingly used to manage that conflict.
Warranty and indemnity insurance provides protection to the parties in the event of a breach of a warranty. There are often limits on how far a seller is willing to or able to provide a warranty. A buyer and/or seller can take out the policy, allowing a buyer to claim directly against the insurer if the seller is unable or unwilling to pay in the event of a breach of warranty and for a seller to claim in response to a claim by the buyer for a breach of warranty.
If the seller has imposed a cap on claims under the warranties – £1 caps are common in the real estate sector – or introduced a time limit for any claims, warranty and indemnity insurance can provide a way for the buyer to get comfortable with the seller’s position. Where there is a group of sellers which includes trustees or institutional investors who would typically resist warranty liability, warranty and indemnity insurance can help resolve that potential conflict between the sellers.
On the buyer side there may be management sellers who will stay with the target following the sale. In the event of a breach of a warranty the buyer may prefer to use a warranty and indemnity insurance policy rather than jeopardise its relationship with the management sellers by claiming against them.
Warranty and indemnity insurance policies are bespoke products and the extent of the coverage and premium costs will vary. However, prices are coming down as they become more popular and premiums of around 1% of the cover sought are typical in the real estate sector. Cover under the policy limit is typically 10% – 25% of the asset value, so a premium might represent 0.1% – 0.25% of the asset value. An excess, usually of 1% of the asset value, is also applied.
As the insurance becomes more popular the options for coverage are also becoming more flexible – one example being 'synthetic’ warranty and indemnity insurance policies for cases where a seller refuses to provide a warranty at all. However, certain risks are routinely excluded, such as liabilities arising from disclosed issues or where there has been fraud or deliberate non-disclosure.
In an uncertain market the certainty provided by warranty and indemnity insurance is welcome, and it is likely to be become ever more popular in the real estate sector and beyond. If you have any queries, please contact Matthew Walker or Richard Clark.